How robust will Netflix’ business model turn out to be?

The acquisition of Lovefilm by Amazon has really got me interested in this business of online DVD rentals and video streaming. It’s fair to say that Lovefilm’s key metrics are completely gazumped by Netflix’ numbers, its US competitor: 1.6m European subscribers (Lovefilm) vs.19.7m US subscribers (Netflix).

But even a successful business like Netflix is not without key challenges to its core business model. Its core shift in focus from posting DVDs to customers to online streaming to computers and tablet devices does imply some tough hurdles.

These are the two key challenges I learnt about:

  1. The introduction of “usage based costing” – Internet Service Providers (ISPs) are increasingly thinking of charging users on the basis of their actual Internet usage. Confronted with a great increase in traffic due to online video downloads, ISPs are looking to recoup the increase of their cost through content providers such as Netflix and Lovefilm.
  2. Content is becoming more expensive – Netflix’ rapid growth could potentially form its own downfall now that content owners (e.g. the big film studios) are demanding a bigger cut of Netflix’ growing profits.

The effects of these challenges are twofold. Firstly, the introduction of “usage based costing” could well limit the growth of online video. Secondly, the growing cost of content could limit Netflix in the number of titles it can afford.

Main learning point: one can see the likes of Netflix and Lovefilm eventually overtaking traditional TV. These companies seem perfectly positioned to do so; access to quality content and ability to reach a large audience across a number of channels. However, more expensive content and paying for Internet usage could throw a significant spanner in the works. It will be interesting to see how the business models of these digital content providers will cope with such challenges in the future.

Related links for further learning:

Financial Times “Netflix on a roll as its switch in focus to streaming catches on with customers”

Financial Times “Netflix challenge to traditional TV”

Becoming a business-critical tool: LinkedIn’s next steps

It has been quite a week for LinkedIn. First it introduced two cool innovations as a result from their monthly developer ‘hackdays’ and it then announced an IPO, to take place later this year.

To start off with the innovative part; I learned about “InMaps” and “Swarm”, two interactive ideas that aim to do more with all the user data generated through LinkedIn.

LinkedIn’s new InMaps is an experimental project which visualizes the connections within your network. LinkedIn filters through my connections and both identifies them (e.g. into key influencers) and groups them (into specific sectors) for me. When I look at my own example it’s interesting to see how my professional networks are neatly clustered along the lines of friends, people related to my current job and fellow-students who I did my MBA with. I can then label these clusters accordingly.

Another recent experiment by LinkedIn is Swarm. This is an interactive tag cloud displaying the most searched companies and terms on LinkedIn. For instance, Dell and Deutsche Bank are amongst today’s most searched companies. Rather than it being a fairly static tag cloud, this one ‘swarms’ around, displaying the most recent searches and content items.

Interesting to see all these new experiments cropping up in the same week that LinkedIn announced its intention to raise as much as $175m from an initial public offering.

Just to summarise the key things I’ve learned about LinkedIn:

  1. It’s looking at ways to make the best use of rich datasets – Senior LinkedIn execs increasingly feel that LinkedIn has thus far only scraped the surface in terms of target audience and the use of the user insights and data available to LinkedIn.
  2. It wants to become a business-critical tool – In line with the previous learning point, LinkedIn have embarked on a mission to become an integral part of any professional’s day. New functionality like LinkedIn Signal and InMaps are definitely useful tools in this respect.
  3. With an upcoming IPO, the goalposts are shifting – The proposed IPO should really help LinkedIn in both growing its audience as well as in converting a large number of currently non-paying members into users who are willing to pay for LinkedIn products on an ongoing basis.

Main learning point: it’s fair to say that there are lots of social media based technologies and sites out there but LinkedIn arguably has a lot of potential to become a long lasting success, serving a designated target market with a range of clearly defined needs. It will be interesting to see how experiments like InMaps and Swarm will be converted into products that will be used widely (and potentially paid for) by LinkedIn users.

Related links for further learning:

Amazon and its quest into the online video market

Earlier this month Amazon, the world largest online retailer, acquired Lovefilm which specialises in online DVD rental, either via post or through streaming films online. Even though Amazon already owned a minority stake, this still is the kind of acquisition that grasps my imagination. It makes me wonder about things like ‘strategic motive’ and next steps.

Let’s start with a possible strategic reason that might be behind this acquisition. So we’ve got Lovefilm, a 6-year old company with about 1.6m subscribers in Europe (Lovefilm is available in the UK, Sweden, Germany, Norway and Denmark).

Amazon currently only offers a video-on-demand service in the US, so one could argue that Lovefilm offers a very interesting diversification area for the European market (not to mention that it has proven to be a steady revenue generator with a solid business model).

There you have it, Amazon’s ongoing quest for (revenue) diversification seems to be the main driver behind this deal. There is more to it though:

  1. These are interesting (and challenging) times for Lovefilm (part 1) – Netflix, Lovefilm’s much bigger US rival (with about 19.7m subscribers), has been looking to venture into the European market.
  2. Lovefilm has been looking for funds to expand for a long time (and its investors for an exit) -Particularly under the leadership of CEO Simon Calver, the business has grown significantly through the acquisition of a range of European DVD-rental business (such as Amazon’s European DVD-rental unit in 2008) and it has been looking for the necessary funds to expand further.
  3. These are interesting (and challenging) times for Lovefilm (part 2) – With a substantial increase in video-driven traffic expected in the next four years, European telcos are likely to start charging companies like Lovefilm and Netflix more aggressively than they’ve been doing thus far.

Main learning point: a while ago I attended a talk by Simon Waldman, Product Director at Lovefilm, where he expressed the business’ desire to expand, both in terms of number of subscribers as well as its product offering (and the platforms it operates on). Amazon’s financial and operational clout will give Lovefilm the firepower to battle powerful (and much bigger) competitors like Netflix and Sky Movies. It also provides the opportunity for Lovefilm to make its products accessible across all platforms, with mobile and smart phones being the holy grail …

Related links for further learning: